Creating Value by Improving the Land
Over the past few years, we've tracked the success of Farmland LP, a fund created to increase the economic yield of farmland through sustainable farming practices.
Their approach is notable in a number of ways. It seeks to improves the quality of the underlying land. To avoid use of fossil inputs. To increase the yield per acre. To enable the production of vegetables, grains, and meats on acreage that before was monocrop. To employ more farmers per farm. To be more profitable than conventional farming. To improve the food resiliency of the local community. To reduce its dependency on liquid fuel transport by serving local markets. To generate annual returns for its shareholders, plus appreciation on their share of the underlying farmland.
The team believes there is an arbitrage in value that can be unlocked by reversing the damage modern farming has done to the land. After visiting their largest property this spring, I put together a detailed write up of how exactly they're pursuing this, which can be read here.
Today's big news is that, while the initial LP fund closed to new investors last year, the same management team has just launched a new fund, this time structured as a real estate investment trust (REIT).
This is notable for several reasons. It's a larger fund, which should enjoy greater economies of scale than the original one. And, the new REIT structure will eventually enable the fund to become publicly-traded (likely in 5 years or so, depending on key milestones). Once this happens, much smaller investors will be able to purchase shares -- finally making the dream of participating in productive farmland an option for all.
Those who would like to learn more about Farmland's operations and/or new REIT can send a request for more information here. Note that their REIT is available to accredited investors only and that Peak Prosperity has an existing business relationship with Farmland (full details will be provided when opening an account with the Fund or at any time upon request.)
Click the play button below to listen to Chris' interview with Craig Wichner (24m:50s):
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson. And you know, here at Peak Prosperity, we talk a lot about the need for new models and ways of doing business that comport well within the growing economic, energetic, and environmental constraints that are bearing down on us. Today I am pleased to welcome back Craig Wichner. Craig is the managing partner of Farmland LP, a fund that serves as a great model for sustainable business. And that is not just our view. Farmland LP was just recently named one of the world’s fifty most innovative companies by the magazine Fast Company and in 2013, it was selected for ImpactAssets 50 as one of the 50 funds who lead their field in creating positive social and environmental impact while generating financial returns.
The way the fund works is investors put up cash, which allows Craig and his team to acquire conventional farmland and convert it to organic, sustainable farmland for the purpose of long-term cash flow and capital appreciation. We have since watched with excitement the success he and his partner, Jason Bradford, have had in making it a real and thriving enterprise. In fact, that success cut off the opportunity for new investors as it filled up and got closed off.
Well, Craig is here today to tell us the good news. There is a new fund opening up and it has got a more accessible structure for most investors. Hey Craig, thanks for taking the time to be with us today.
Craig Wichner: Oh, glad to be here.
Chris Martenson: So congrats on the launch of the new fund. This is really just fantastic news. For those listeners not familiar with Farmland and its mission, can you just provide us a quick recap?
Craig Wichner: Sure, absolutely. So Farmland LP owns $50,000,000 worth of farmland. We buy conventional farmland and convert it to organic, sustainable farmland as an investment fund. And we are just opening up our next fund, a $250,000,000 REIT so that people can invest in well managed—professionally managed—farmland using sustainable agriculture best practices that generates higher revenue, has lower input costs. And really just it being a real asset investment provides a nice, stable source of capital appreciation and cash flow for the long haul.
Chris Martenson: Absolutely, an investment you can feel good about. Now to round out something you just said, that first Farmland fund was a limited partnership—that is the LP in the name. But your new fund is a Real Estate Investment Trust, or REIT, which you pronounced as reet, that is how it is pronounced. Why did you structure the new fund as a REIT?
Craig Wichner: Well, REITs were a legal structure that was set up in the '60s that were designed as a way of allowing investors to hold portfolios of real assets—cash flowing assets—in a way that was similar to the way people invest in stocks. And up until then, if you wanted to own an apartment building or office buildings or farmland, you basically had to buy the building yourself or participate in limited partnerships or things like that. And there were some tax disadvantages for structuring it like that.
So in the '60s, the government created this real estate investment trust structure that allowed investors to basically pool their capital, buy large, diverse portfolios of cash flowing assets, and get some really wonderful tax advantages. As long as these REITs distribute 90% of their cash flow that they generate, those distributions are done tax free. They are basically not taxed at the corporate level and that double taxation problem that you have when you do dividends.
And so it just is a more convenient, good way of holding these assets. It makes it easy for people to hold these assets in retirement accounts or foundations and endowments. International and domestic investors basically prefer this form of holding these assets.
The problem is that in order to comply with all the regulations, it really requires a larger size fund. So our first fund was $50 million; this next one is $250 million, and that is really a good size to basically take advantage of the structural advantages of the REIT where the cost basically becomes de minimis at that point.
Chris Martenson: Now this REIT as it is being structured, is this going to be publicly traded right away? Or how are you planning this to work?
Craig Wichner: It is a private REIT at this point. The plan basically is to raise capital, buy the farmland, and increase the cash flow. Basically, we are buying farmland at around 3.5% cash flow, increasing it to 6% to 8% by using our management practices, which I am glad to talk about. And then once we stabilize those cash flows, then the plan is to take it public as a REIT so that basically, anybody would be able to invest in sustainably managed farmland and help convert more farmland to sustainably managed farmland, basically just by buying stock at their Schwab brokerage or something else.
Chris Martenson: Any competition on that front so far?
Craig Wichner: Well, there are a couple small funds that went public that basically went public at the same size as our first fund, our $50 million Farmland LP fund. And we just think that is too small to deal with the costs associated with being a publicly traded company. $250 or $300 million is really the minimum size that you need in order to be public and you get actually better economies of scale by being larger.
Chris Martenson: When you launched your first fund, you had yet to purchase any farmland at all so investors were pretty much going on faith in the vision that your team had. But now you have had nearly five years of history deploying your model on nearly 7,000 acres, both in Oregon and California. Tell us about the performance of those properties to date. Have things gone as planned?
Craig Wichner: Yeah, so five and a half years ago, Jason Bradford and I, my business partner, took a road trip up to Oregon to look at buying farmland for ourselves. It was an investment and we definitely were fans, as well, of the energy economy and environment perspective that you talk so well about. So we took a week-long road trip, looked at all kinds of farmland, and really got clear that, 1.) farmland was a great asset class to invest in—a nice appreciating asset with stable cash flows—and that we could add value to that farmland by basically bringing livestock back on the crop land and convert that land from commodity crops to organic crops—things that we can get price premiums on. But we also saw that doing it at the scale that we were thinking about it just was not going to work. We needed at least $10 million worth of farm land in order to be semi-profitable with us driving the tractors. And if we wanted to get the cost structure down to something that was more institutionally friendly, then we needed at least $50—maybe even $100 million worth of farm land.
And so it was really on the road trip driving back from that week-long road trip that Jason and I crafted Farmland LP and we have been working on basically that exact plan ever since. And it has actually turned out very, very well. You know, we have actually looked at the financial curves and they look very similar, basically, to what we projected, as well.
So we now own $50 million worth of farmland—about 7,000 acres worth of crop land. We have 783 acres already certified organic. We have switched land from growing corn and other commodity crops to producing a wide variety of premium sheep, cattle, pastured poultry for egg production, organic vegetables, other organic feed crops, in a nice, sustainable agriculture rotation. The economics have worked out well and the financial performance is doing well.
We are also very happy that we have a view of buying real estate—that these are very long term assets. And so we basically saw the potential issues for water and bought very good water rights with our property. There are a number of different ways that farmland is—we do not think is valued very well. Two pieces of dirt right next to each other can sell for the same price but they could have very different intrinsic values, whether it is related to water or soil or other conditions. So we have been able to look at farmland where we think that we can add the most value to. We have been very successful at buying that land and generating good returns on it.
Chris Martenson: Well, let’s talk about how this is going to scale. Adam put together a detailed recap of his visit to your largest property in Stockton, California, where you held your latest investor appreciation event. He was really impressed by both the quality of the property itself—as you are mentioning, you picked well—as well as the development plan the Farmland team had for it.
Okay, so how, if at all, will the property acquisition and management strategy for this new REIT differ from the former LP fund? And can you scale?
Craig Wichner: Good question. One thing that people really are not familiar—people are not generally familiar with real estate in general as an asset class and even less so with farm land. So there is about $2.4 trillion worth of farm land in the US, and if you look at the other forms of commercial real estate—office buildings, apartment buildings, shopping malls—those are actually all about the same size as the farm land market. And when you add them all up, including farm land, it is around $18 trillion worth of these commercial real assets in the US. And if you add up the value of the publicly traded US companies, I think it is around $18.6 trillion. Really, almost the same size as commercial real estate. And yet people’s awareness and people’s attention is focused on basically fractional units of companies, which are much harder to diligence and have, to me, some management questions and concerns in general. As opposed to nice, tangible, real assets. We generally are not fans of leverage. We can use some but we generally like unleveraged farm land that generates nice cash flow and where we can increase that cash flow.
So out of this $2.4 trillion worth of farm land, even with $250 million for our REIT, it is really a very small portion. It allows us to be very selective and really identify the properties that, to us, have the largest upside—are basically the most mispriced. And we are looking at properties that we want to own for 10, 20, 30, 50 years and more and it is a pretty unique perspective, as well. We actually have—we are just launching this fund. We already have one property under contract. We have three more that we are evaluating. We basically have over $50 million worth of farm land in the pipeline right now and we are really just getting started.
So we think that we will be able to find, buy, and manage farmland very, very well. We are successfully managing our 7,000 acres right now, and we really have a nice track record, good management systems for being able to manage larger properties and scale up the fund quite nicely.
Chris Martenson: Excellent. So if someone invests in this new REIT, what should their expectations be as an investor? I am thinking about—they are in this for the duration, I guess—what kind of return do they expect in the first few years and things like that? Because I know you have quite a bit of build-out and capital improvements and other things, considerations, as you are converting what I guess is almost always nonorganic into organic.
Craig Wichner: That is right. But the farm land that we buy generally is cash flowing when we buy it. So we specialize in basically making sure that the cash flow continues as much as possible, even during the conversion period. And we have been actually even more successful with that in the larger properties that we have bought.
So you know, investors basically—we do not do farm land as an asset class where you can flip. We do not think it is a good business model to buy farm land, lever it up, and count on selling it in five to seven years at some big markup. We think that the value of farm land is capital appreciation long term, but it is primarily that increasing cash flow— increasing the cash flow from 3.5% to 6% to 8% and even more. Then it also continues to increase with inflation.
So in terms of the on-the-ground management where we are really adding value is really converting from those commodity crops where you have maybe one farmer growing one kind of crop on 2,000, 4,000, 6,000 acres at a time and they are producing that one commodity crop because it is efficient for them. They have bought large equipment and they just want to use it, and that is how they get the best returns on their equipment. And for them, the farm land is basically free. They generally have it for 20, 50, 100 years or so. And you know, it may be operationally efficient for them to produce those commodity crops but it is not the best way of generating returns from the asset.
We view farmland from: How do we get the best returns from the asset itself? My business partner is a PhD in Biology, I have a degree in Biochemistry. We understand actually that to get the best productivity from farm land, the farm land actually wants to be rotated. It actually wants livestock on cropland and it wants sheep and cattle and pastured poultry on that land. And it wants it in that pastured, restorative phase for three to seven years. That actually generates much more revenue than the commodity crops that would normally grow on that land and it generates around $180 to $200 worth of soil fertility per year in that soil.
And then after it is certified organic after three years, then we can rotate in organic vegetable farmers and they generate great returns from their vegetables, and also save a lot of money from not having to put in input costs, because we have had our livestock add that soil fertility over the past three to seven years.
Then after two to three years, those organic vegetable farmers rotate onto the next piece of pasture, we bring in a grain farmer or put it back into pasture, and we are managing this rotation on an ongoing basis. And it really is a much better way of managing farm land. It generates more revenues, lower input costs, it is more profitable, even while it is creating more jobs per acre. And it does that in part by the price premiums that people are willing to pay. But even if there were no price premiums, because the input costs are lower the farmers would be more profitable and we would be more profitable.
Chris Martenson: You know, Craig, sometimes I have described this idea to people and they question me is well, "doesn’t this just price farmers off the land?" And I know from having talked with you in the past that your farmers apparently actually think this is a great deal and controls risk for them. Is that true?
Craig Wichner: It is very true. Actually today, 40% of farm land is leased. So that is very true. Today, 40% of farm land is leased in the US. And so the farmers actually know that they actually can make more money on leased land than they can on owned land. And in fact, we have really created some tremendous barriers for farmers with just the price of land as it is. If a farmer wants to double their business, they just have to spend a lot of money on land. We did not create this problem, this problem has basically been there for a long time. And it is not unique to farm land.
If you think of any other asset classes—think of office buildings. We rent our office space and when I want to grow my business, I just rent more office space. I do not buy an office building and then when I want to double my staff I have to buy a new office building and fill it up. But that is really what we have forced farmers to do with basically kind of an old business model there.
And it is even worse for the organic farmers. The organic farmers, if they want to double the size of their business, they have to buy twice as much land. Then they have to spend three years converting that to certified organic farm land. And then that fourth year, they have to double their sales instantly in order to pay for all this land. It is really an absolutely huge capital barrier and it is resulting in a big mismatch between the demand for organic food, which is growing at over 14% per year—it is 4.5% to the US food budget. So it is 4.5% of the US food budget is the demand for organic food, but the supply of organic farm land is only around 1% of the farm land. That is a big gap, and that is because of these capital barriers.
So what we are doing is we are helping convert more farm land to sustainably managed, certified organic farm land. We are taking the burden—that capital burden—off of the farmers and putting it onto people who actually benefit from the diversification, getting out of the stock market and putting their capital into real assets. And more importantly, by putting their capital into sustainably managed land. We work very hard to align our interests with the farmers. So we do revenue sharing or profit sharing arrangements with the farmers so that yes, when they do well, they are getting larger total dollars, same basic percentage as they would otherwise. But when they have a bad year, they do not have to worry about going bankrupt. And our investors might take a little bit of a cash flow hit but we also have 20 other farmers that we are working with. So one farmer, two farmers may have a bad year but the investors in general are not hurt and the farmers who might otherwise be facing bankruptcy, they just basically have to set up again for the next year. But they did not dig a deep hole for themselves, which they would if they had gone into debt and bought this farm land.
So this is really a better way of managing farm land. I do not think that 100% of farm land in the US should be done this way, but I certainly think that out of the $2.4 trillion worth of farm land, some portion of that—this is a really wonderful way of actually managing farmland and also making sure that it is sustainably managed for the long haul.
You know, when farmers run into financial trouble, then they have to revert to more sure things. Maybe they have to add back in fertilizers or chemicals or pesticides or GMO seeds just in order to pay that bill, just in order to send their kids to college. We look at the farm land from a much longer term perspective. We use little or no leverage on the farm land. So that allows us to really take that longer term perspective, manage it for the long haul, use sustainable agriculture, basically use the soil biology to increase that soil fertility. And that creates really wonderful long-term benefits. It is a better way of managing farm land. It generates greater financial returns and really helps distribute everyone’s risk. It reduces the farmer’s risk, it reduces the investors’ risk, and it creates a lot of benefits versus the system that we have now, which really looks like, you know, 53% of US farmland is growing two commodity crops—corn and soy. That is what the current system that we have has produced, and we just think there are better ways.
Chris Martenson: Of course there are better ways. I just could not be a bigger fan of doing it this way. And I have often said that we do not need any brand new technologies to be developed to really start doing a much better job of living within the realities as they exist. We have to just start doing the things that we already know can be done and yours is a perfect example of that. It works. And I love the win-win-win aspect of this that I think it is a great vehicle for investors, it gives them exposure to an asset class that is otherwise very difficult to get exposure to, and it is a long haul, decent return, cash flow positive kind of business. It is great for the farmers who can then lease the land and not have to undergo the tremendous financial risk of converting farm to organic and doing all of that. It is a win for the land where it is provably and demonstrably being improved over time and that is something that you both track and measure because that is your livelihood.
So I love all of that. And I am sure other people are just as interested as I am. We have a link provided at the bottom of this podcast that people can click and find out more. But otherwise, people who are considering investing in this REIT, what do they need to know and what should they do?
Craig Wichner: The first thing is that while it is a private REIT it is open just to accredited investors. So the general standards are $1 million net worth or about $200,000 a year in income. And that is just requirements put on us by the FCC. But if they meet that criteria, then they are glad to approach us for information at FarmlandLP.com. Certainly, I recommend going to the link at the bottom of you guys' page.
We do have one property under contract and several more in the pipeline so the fund is open and we are glad to answer any questions. For investors who are not accredited, we do want this to be a publicly traded fund at some point. It is probably going to be five years out. But the people who are accredited and investing early are really helping create what we think is a better way of managing and owning farm land, which is to have an investment plan dedicated to the sustainable management of farm land, long haul, that is publicly traded that people put their capital into to get the benefits of that kind of management.
But also, it is also a vote for the kind of society that we want in the future. There is a huge dominance of the chemical-dependent agriculture out there. And the main thing that we are demonstrating is that sustainable agriculture is more profitable than chemical-dependent agriculture. That is why we set this up as an investment fund. That is what our financial results are showing. Sustainability makes sense in the long haul and you know what? This is the long haul.
Chris Martenson: Fantastic. And I love that point that the accredited investors who do support this fund are going to be the ones who are going to be supporting—ultimately bringing this concept out to a much wider audience because "publicly traded" simply means that people do not have to be accredited at that point to participate. Liquidity is good, you can buy and sell in the open market, and all of that is just wonderful.
So Craig, thank you so much for your time today and really, best of luck in funding and managing and acquiring the properties that you want in this new REIT.
Craig Wichner: Great talking to you as always and really appreciate what you are doing with your audience in terms of educating them about not only the future that we are looking into but how the world is right now and what people can do about it.
Chris Martenson: Yeah, thanks for that Craig, because I think the future has arrived. All right, well, thank you so much. I hope to get my own chance to tour the properties at some time.
Craig Wichner: We would love to have you any time.
Photo credit: Farmland LP website
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